Corporation tax rates and capital allowances for business
Measures reducing corporation tax rates and allowances already announced in 2010 have been included in Finance Bill 2011. These are discussed in more detail below and cover the following:
- the main corporation tax rate from 1 April 2012 will reduce to 26%, while ring fence profits in the oil & gas regime will remain taxable at 30%;
- the small profits corporation tax rate will reduce to 20% from 1 April 2011, while for ring fence profits it will remain at 19%. The corresponding fractions for marginal relief will be 7/400 and 11/400;
- capital allowance rates will be reduced as follows:
– main pool annual writing down allowance from 1 April 2012 (companies) and 6 April 2012 (unincorporated businesses) reduced to 18%. This extends the period by which 90% of expenditure is written off from just over 10 years to just over 11 years;
– special rate pool annual writing down allowance from 1 April 2012 (companies) and 6 April 2012 (unincorporated businesses) reduced to 8% (but allowances will remain at 10% for ring fence oil & gas businesses). This extends the period by which 90% of expenditure is written off from 22 years to 28 years;
As with previous changes to writing down allowance rates, where an accounting period crosses the date of change, a hybrid rate of allowance will apply, based on a proportion of the old and new rates according to the number of days before and after the date change;
- the annual investment allowance from 1 April 2012 (companies) and 6 April 2012 (unincorporated businesses) will be reduced from £100,000 to £25,000. Where the accounting period crosses the date of change, the maximum annual investment allowance for the accounting period will be calculated by apportioning the allowance before and after the date of change according to the proportion of the year either side of that date change. However the date the expenditure is incurred will be important, as any unused annual investment allowance of the period prior to the date of change cannot be used to cover expenditure incurred on or after the date of change.
The changes to capital allowance rates and allowances will increase the incentives to incur plant or machinery expenditure that qualifies for 100% allowances such as enhanced capital allowances for qualifying energy or water technology. No further announcements on enhanced capital allowances have yet been announced, though refinements to the regime, either improving the administration of the claims process or rationalising the way such allowances are given may be considered as part of the Office of Tax Simplification's review of tax reliefs. There will also be increased incentive to make short life asset elections where appropriate for plant or machinery that would otherwise qualify for the general pool, as it may be possible to obtain the full allowance over the actual life of the asset rather than an extended period based on the 18% reducing balance writing down allowance rate.
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